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Phoenix Residential Market Report ~ November 2014

Real Time_Supply

Pie Chart_Market

Average Sold Price_Monthly

Average Days on Market_Monthly

Active vs Sold Transactions

Foreclosures_Monthly

Short Sales_Monthly

The current real time market profile shows there were approximately 10,009 new listings on the market in October 2014 but only 6,244 sold transactions. Currently the number of transactions is back down to the amount experienced in 2008 and as a result there is an increase in inventory because the number of listings is not being purchased at a fast enough rate.

Since November 2013 (12 months ago), the average sold price has increased approximately +2.6% (up from last month), the average days on market have increased approximately +39.7% (up from last month) and the number of transaction has increased approximately +25.1% (down from last month). Since the month of November 2013 the average sold price has teeter tottered up and down with no upward trend. This is good news since the market has not formed a downward trend. We will not see an indication of a market reversal until there have been two to three consecutive months of upward or downward pressure on the average sold price, DOM and number of transactions. The current average sold price is approximately $248,000 which is up slightly from last month.

The volume of foreclosure purchases since November 2013 (12 months ago) has increased approximately +4.7% and the volume of short sales have decreased approximately -37.0%. Since November 2013 the volume of foreclosure purchases went up the beginning of the year and now the trend is back downward. Since August 2013 the volume of short sale purchases have consistently decreased because the inventory of homes “up-side-down” have been exhausted and values have risen to a point where consumers can break-even or sell with some equity.

Since November 2013 (12 months ago), the number of homes for sale on the market have decreased approximately -0.6%. Since March 2014 there were 29,435 homes for sale on the market but the number of homes for sale has been gradually decreased to 26,668 or a -9.4% decrease in November 2014. This decrease in the number of homes for sale could be a sign the market is beginning shift once again back to a seller’s market (low supply and increased demand) but we will not know for sure until after the holiday season.

Real estate prices are still relatively low (near 2008 prices), mortgage rates are still at a historical low and the macroeconomic market is improving both in terms of prices and the overall economy. Give us a call to discuss your best investment strategy, TODAY!!

Position Realty
Office: 480-213-5251

Common Legal Mistakes Real Estate Investors Make

You can’t expect to reduce your risk of getting sued to zero, but you can take steps to reduce your risk as much as possible. In any situation where your money is at risk, ask yourself, “Is there a better way?”

Know the legal and financial risks of the situations in which you place yourself, your business, your family, and your assets.

Without covering every issue involved, here are a few common mistakes that investors make, novice and experienced alike.

Poor Legal Forms

It’s amazing how short-sighted novice investors can be when it comes to shelling out money for good legal contracts. They often buy contracts at discount office supply stores, from Internet web sites, or borrow them from friends.

However, a real estate deal is only worth the paper it’s written on. Like the old expression, “every tax strategy works until you get audited,” it can also be said that “every contract works until you have a dispute.”

So invest in a good set of legal forms that apply to your practice and ask a local real estate attorney to review them. Also, make certain you fill in the forms correctly—a good real estate attorney will review contracts for just a few hundred dollars.

Too many people rely on real estate brokers to fill out contracts, which is fine for a “standard” deal. However, most brokers aren’t trained in legal matters and often create long contract addendums that are insufficient to protect your interests.

Illegal Discrimination

The Fair Housing Act of 1968, as amended, prohibits discrimination on the basis of race, color, religion, nationality, familial status, age, and gender. Many state and local laws also forbid discrimination on the basis of sexuality or source of income and the Americans with Disabilities Act makes it illegal to discriminate against disabled people.

If you harbor any such prejudices and would allow them to come into play when renting a housing unit, then you’re probably not cut out to be a landlord. However, many sincere real estate investors make honest mistakes that result in discrimination lawsuits. The best way to avoid these lawsuits is to be informed.

The Fair Housing Act may appear to be common sense and most people would never think of discriminating against people of different races or religions or on the basis of gender. However, it’s important to note that the Act extends beyond the screening process and into advertising as well, so watch the wording on your ads.

This is where many landlords and property managers make critical mistakes. Some people scour the classifieds looking for inappropriately worded ads so they can pounce on them and threaten a lawsuit. While someone must have standing to bring suit, these scoundrels often work in coalitions to ensure that all of their bases are covered.

For example, if you own a rental property in a predominantly Jewish community, its proximity to the local synagogue could be a major feature. But if your ad says “within walking distance of the synagogue,” you could be sending the message “gentiles need not apply”—even though this wasn’t your intent.

And keep in mind that you may not discriminate on the basis of whether a couple is married and whether children are to live in the unit. You may also not discriminate on the basis of age. Often, novice landlords aren’t aware of these areas of concern. And while it’s good that citizens are more aware of their rights today, it can create a bad situation for well-meaning landlords who are out of step with the law.

Be aware of your local laws and use good business sense. State law and local ordinances can extend similar protections granted under the Fair Housing Act to other groups. For example, California, Minnesota, and North Dakota prohibit discrimination based on source of income. In other words, landlords can’t discriminate against would-be tenants who rely on public assistance. Putting the political perspective of the landlord aside, such discrimination makes little business sense because people on welfare or social security are virtually assured of a fixed income.

The Americans with Disabilities Act (ADA) prohibits discrimination against the disabled and also requires landlords to make “reasonable accommodations” to disabled tenants. Who decides what’s reasonable? Typically, judges, if it comes to that. But while most landlords are aware of the ADA and would never stoop to discriminate against a person in a wheelchair, many are unaware that the ADA also protects mentally disabled tenants. A mental disability could also include recovering alcoholics and drug addicts. On the downside, these people can relapse; if they do, this can cause serious problems for you and other tenants. Everyone deserves a second chance and many recovering addicts become productive members of society. Those unable to recover typically have other problems and, thus, if you decide to reject their rental applications, it’s vitally important that you document additional reasons for rejecting their applications.

Improper Disclosures

Improper disclosures are a common mistake for investors. It’s critical to be aware of the federal and state requirements for disclosures. For example, federal law requires a lead-based paint disclosure on the sale or rental of properties that were built before 1978. State laws may have additional regulations.

It’s become common practice for real estate brokers to use a property disclosure form as a general-purpose sell disclosure for all aspects of the house. Even if you’re selling your house on your own, be sure to use one of these forms. Whenever in doubt, disclose what you know, especially something the buyer or tenant may not know about, such as dangerous conditions, water damage, electrical issues, or plumbing problems.

Illegal Solicitation of Money

Many novice investors try to solicit money for investing via public advertising or mailings. This is commonly referred to as syndication. You may inadvertently cross over a variety of federal and state securities regulations when trying to raise capital. Chatting with friends over the dinner table about a real estate deal is one thing, but advertising to the public in mass may be considered a public offering. Before soliciting money from strangers, review your marketing, paperwork, and solicitation strategies with a local attorney well versed in this area of law. You may be able to get away with a good set of written disclosures if you solicit money on a limited basis, but it’s better to be safe than sorry.

Independent Contractor Liability

The IRS and your state department of labor are on the lookout for employers who don’t collect and pay withholding taxes, unemployment, and workers’ compensation insurance. If you have employees that are “off the books,” you’re looking for trouble. If you get caught, you’ll have to pay withholding taxes and as much as a 25 percent penalty. Intentionally failing to file W-2 forms will subject you to a $100 fine per form. The fine for failing to complete the Immigration and Naturalization Service (INS) Form I-9 varies from $100 to $1,000 per form. Your corporation or LLC won’t shield you from liability in these cases, either. All officers, directors, and responsible parties are personally liable for the taxes.

If you hire people to do contract work for you on a per-diem basis, they may be considered employees by the IRS. If any workers fail to pay their estimated taxes, you may still be liable for withholding. If these workers are under your control and supervision and work only for you, the IRS may consider them employees, even if you don’t. If this happens, you may be liable for back taxes and penalties.

To protect yourself, you should:

  • Hire only contract workers who own their own corporation or get the business card and letterhead of any unincorporated contractors you may use so you can prove these workers aren’t your employees.
  • Require proof of insurance (liability, unemployment, and workers’ compensation) in writing.
  • Get written contracts or estimates on workers’ letterhead that states they’ll work their own hours and you don’t have direct supervision over the details of the work.
  • Have letters of reference from other people for whom the contractors worked to show that the contractors didn’t work solely for you. Keep these in your files.
  • File IRS Form 1099 for every worker to whom you pay more than $600 per year.

In addition to possible tax implications, an independent contractor can create liability for you if a court determines the contractor is your employee. For example, if your independent contractor is negligent and injures another person, the injured party can sue you directly. If facts show that you exercised enough control over your contractor, a court may rule that this contractor is your employee for liability purposes. As you may know, an employer is “vicariously liable” for the acts of his or her employees—the employer is liable as a matter of law without proof of fault on the part of the employer. Make certain you follow these guidelines when hiring contractors and pay particular attention to the issue of control.

Finally, under your state’s law be aware which duties are considered inherently dangerous, such as providing adequate security for tenants in a multiunit building. These duties can’t be delegated to an independent contractor without liability on your part, regardless of whether the person you hire is considered an independent contractor or an employee.

Position Realty

Office: 480-213-5251

Phoenix Residential Market Report ~ August 2014

As you can see from the first chart above, Position Realty Market Index, the first time home buyer tax credit created a great deal of demand in the market similar to the real estate boom from 2004 to 2006. Currently the number of transactions is slowing down as a result there is an increase in inventory because the number of listings is not being purchased at a fast enough rate.

Since September 2013 (12 months ago), the average sold price has increased approximately +5.5% (up from last month), the average days on market have increased approximately +42.6% (up from last month) and the number of transaction has increased approximately 2.6% (up from last month). Since the month of September the average sold price has teeter tottered up and down with no upward trend. This is good news since the market has not formed a downward trend. We will not see an indication of a market reversal until there have been two to three consecutive months of upward or downward pressure on the average sold price, DOM and number of transactions. The current average sold price is approximately $252,000 which is unchanged from last month.

The volume of foreclosure purchases since September 2013 (12 months ago) has decreased approximately -19.3% and the volume of short sales have decreased approximately -59.7%. Since October 2013 the volume of foreclosure purchases have teeter tottered up and down with no upward trend. Since August 2013 the volume of short sale purchases have consistently decreased because the inventory of homes “up-side-down” have been exhausted and values have risen to a point where consumers can break-even or sell with some equity.

Since September 2013 (12 months ago), the number of homes for sale on the market have increased approximately +18.3%. This increase in the number of listings is caused by investors leaving the market and sellers that purchased during the real estate boom are putting their homes on the market to break-even or sell with a small amount of equity. During the month of August the number of homes for sale has decreased from 26,903 homes to 26,063 homes or a decrease of approximately -3.1%. This is a good sign for the market since an oversupply of homes on the market will cause real estate prices to decrease and the summer buying season has been slower than in recent years.

As more and more sellers enter the market and as more of the supply of residential homes increase, real estate prices may start to decrease (more supply and weaker demand causes prices to decrease).Real estate prices are still at an all time low (near 2008 prices), mortgage rates are still at a historical low and the market is improving both in terms of prices and the overall economy. Give us a call to discuss your best investment strategy, TODAY!!

Phoenix Residential Market Report Summary – April 2014

As you can see from the first chart above, Position Realty Market Index, the first time home buyer tax credit created a great deal of demand in the market similar to the real estate boom from 2004 to 2006. Currently the number of transactions is slowing down as a result there is an increase in inventory because the number of listings is not being purchased at a fast enough rate.

Since May 2013 (12 months ago), the average sold price has increased approximately +4.0% (down from last month), the average days on market have increased approximately +29.7% (up from last month) and the number of transaction has decreased approximately -15.9% (up from last month). Since the month of September the average sold price has teeter tottered up and down with no upward trend. This is good news since the market has not formed a downward trend. We will not see an indication of a market reversal until there have been two to three consecutive months of upward or downward pressure on the average sold price, DOM and number of transactions. The current average sold price is approximately $252,000 which is down approximately -1.9% from last month at $257,000.

The volume of REO purchases since May 2013 (12 months ago) has decreased approximately -44.6% and the volume of short sales have decreased approximately -74.4%. Since October 2013 the volume of REO purchases has increased approximately +11.1%. The volume of REO purchases is rising again because Fannie Mae and institutional lenders have been holding onto inventory and they are starting to release their inventory at a faster rate. The volume of short sales are still down but REO purchases are back on the rise.

Since May 2013 (12 months ago), the number of homes for sale on the market have increased approximately +50.6%. This increase in the number of listings is caused by investors leaving the market and sellers that purchased during the real estate boom are putting their homes on the market to break-even or sell with a small amount of equity. Real estate prices have reached a point where sellers are listing their homes at a faster rate than buyers are purchasing. This has not cause a decrease in real estate prices and as we enter the Spring / Summer buying season we are seeing an increase in the number of sold homes.

As more and more sellers enter the market and as more of the supply of residential homes increase, real estate prices may start to decrease (more supply and weaker demand causes prices to decrease).Real estate prices are still at an all time low (near 2008 prices), mortgage rates are still at a historical low and the market is improving both in terms of prices and the overall economy. Give us a call to discuss your best investment strategy, TODAY!!

Position Realty
Office: 480-213-5251

Upside Deals: Building a Money Pump

The quickest way I know to make significant profits with commercial real estate is to do deals with substantial upside potential.

But first let’s define “upside”. I’m not talking about a paper increase in value due to scheduled rental increases, or replacing “below-market” leases, as many for-sale brochures define the term.

My definition of upside is to unlock hidden potential in a property that creates triple digit percentage gains on investment, provides positive cash flow along the way, and avoids major risks of loss. The upside may come from expansion, redevelopment, or by changing the market position of the property with major improvements.

How do you do that?

It boils down to three critical factors: the local market conditions; good structural bones; and a willing seller. When all three are present the deal is there for the taking, but only if the investor can design and implement the proper structure. The focus of this discussion will be in creating a structure to create and capture upside.

Market Is King

First and foremost is the local market. Regardless of property type, the first rule of real estate investing is we do not make markets—we serve them. A poor market will stop any plan dead in its tracks, so the first priority for any strategy is make sure the area demographics of population, income and employment are in a positive trend. Basic demographic research includes statistics for a three- to five-year period to show the trends. One year’s data is useless. To say a market had a 2% population growth in the previous year means nothing. But if the current 2% increase is up from 5% loss over the last five years indicates the market is turning and worthy of further investigation. With that knowledge we can be confident in seeking out the worst property we can find in a good location, because that’s where we’ll make the most money.

Good Bones

What we’re looking for is the things that can’t be changed being sound. We look beyond the cosmetics to the structural elements, such as foundations and basic construction of the buildings, the systems, and the grounds. If the structural elements are failing, then the property may not be suitable for turnaround without expending more funds than can be recovered. Aesthetics can be fixed.

Unless you are an expert in building systems, construction and environmental issues it is advisable to hire experts to inspect the relevant elements of the property. The cost is negligible when compared to the cost of fixing a mistake, or worse, not being able to fix it. Location is something else that can’t be changed. Don’t fall for the old sales line of “priced below replacement cost”. My first question is always “If given the chance to replace it, would I?” Understand the local market and how it works. A great deal in a bad location is not a deal… it’s a problem looking for an owner.

Seller Motivation and Deal Structure

The final question is to assess the seller’s willingness to help us solve his problem. There are a number of ways to accomplish that, and it takes some digging to get into the seller’s mind and discover his true motivations. Most commonly the property has existing debt. The seller may offer to finance part of the purchase price as a second mortgage. But the property can rarely support a new loan, and that requires the buyer to fund improvements from cash out-of-pocket. That’s hardly an attractive proposition, as the cash flow is usually not sufficient to carry the additional debt of the seller’s note and provide a return on the investor’s capital.

Typically the alternative is for the seller to greatly reduce the price, even below the amount of current debt, or accept a subordinated note with no payments. With those options many sellers will opt to keep the property rather than take the risk for no money. The deal falls apart for lack of an alternative structure. The ideal structure would allow the investor to obtain new financing that includes the funds needed for improvements, the seller to realize some of the upside in return for staying in the deal, and designed so the property produces a positive cash flow. Can that be done? Yes it can, as the following example from my files demonstrates.

The Deal

The deal was a 54-Unit apartment complex, well-located in a great college-town market. The owner had let the property decline to the point that the performance had suffered tremendously. The expenses were high and the income unstable due to the poor condition of the property. The buildings needed new roofs, windows, kitchens, paving, heat pumps and new appliances. The existing NOI (net operating income) was about $145,000. The owner had existing debt of $950,000. The improvements were estimated to cost $350,000. The as-is appraised value (and the asking price) was $1,200,000, reflecting an as-is 12% cap rate. The projected value after the improvements was estimated to be $1,750,000, using the same NOI but a lower cap rate (8%) to reflect the completion of the capital improvements.

The Structure

We came up with the following deal structure: In lieu of down payment, the seller would get 20% equity-only (not profits) interest in a new LLC that would acquire the property. The LLC would obtain a bridge loan for $1,300,000 to pay off existing mortgage and fund the repairs.

The Plan

Our investment plan was to complete the improvements over a six-month time frame, and then raise the rents to market levels. In the first year we planned to complete the improvements and raise the rents for upcoming leasing season. No occupancy increases were projected, but the combination of higher rents and lower expenses were projected to significantly increase the NOI and cash flow. In the next two years it was expected that the occupancy would also rise to an average 97%, excluding collection and vacancy loss, further increasing NOI and cash flow. In the third year the LLC would refinance the property based on the increased income, and use the proceeds to pay off the seller’s LLC interest. At that point we would own 100% of the LLC interests and could either hold the property or sell at will.

The Result

The improvements were completed and the rents were raised $50-$75 per unit in the 1st year. Annual increases of $20 per unit were implemented in following two years. The occupancy increased from 90% to 98%, raising the NOI to almost $190,000, and the cash flow to $80,000. Now it was time to turn on the money pump. The property was refinanced with a $1,500,000 loan based on the higher value. We used $200,000 of the proceeds to pay off the seller’s interest and the LLC kept about $50,000. The loan was at a lower rate and longer amortization, so the cash flow actually increased to about $90,000. We held the property for two more years, and then sold it at a 7.6% cap rate on the next year’s projected net operating income of $186,200, yielding a price of $2,450,000.

Over the five year hold period the investment produced:

3 years cash flow @ avg. $80,000 = $240,000
2 years cash flow @ avg. $90,000 = $180,000
Refinance proceeds– $250,000
Equity at sale– $1,050,000
Total cash and equity $1,670,000
Less seller’s interest –$200,000
Total Gain–equity and cash $1,470,000

If you were paying close attention, you realize now that the deal was done with no money out-of-pocket from the buyer, but with none of the risks of over-leverage.

Position Realty
Office: 480-213-5251

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